Reminder: Category 2 Banks Will Serve Up Their U.S. Depositors (6/11/14)

I recently read Stephen Dunn's blog entry, Beware Of Swiss Banks Urging Offshore Voluntary Disclosure To IRS (Forbes 6/8/14), here.  The general caution he gives is to understand the motives of Swiss Banks in requesting that their U.S. depositors enter OVDP.  The Swiss banks are serving their own self-interest by getting U.S. depositors to join OVDP because, provided the Category 2 Swiss banks can show proof of their U.S. depositors having done so, the Swiss banks can avoid the penalty on the account imposed by DOJ's Swiss bank program.  For example, on a $1,000,000 high amount deposit during the applicable period, the Swiss bank can save $200,000 to $500,000 by showing such proof (which, of course, the Swiss bank will have to get from the U.S. depositor, which is another story / blog entry).

The blog reports that one of the inducements made by the bank was that, failing return of the waiver, the account would be treated as a "Non-Consenting U.S. Account" that would start a process of disclosure of aggregate data that will lead to a group request for identities under the Implementing Agreement.  The blog then reports that, because the particular client in issue had closed the Swiss bank account in 2009, the client's deposit information in issue was not subject to the Agreement (which applies only to accounts in existence as of 12/31/13).  The blog entry rightly notes that the Swiss Bank therefore cannot (i) include the particular client's information in the aggregate data required by FATCA and (ii) disclose the client's identify should a request for identity be made (as is likely).

But, that is not the end of the story, which is why I write this blog.  Persons situated similarly to the client discussed in the blog -- i.e., who have closed their Swiss Bank accounts prior to 12/31/13 -- will indeed dodge the disclosure bullet under FATCA and the Implementing Agreement.  But there is another bullet, of similar effect, that they will not be able to dodge.

Under the U.S. DOJ program for Swiss banks, Category 2 banks must provide the following for "all U.S. Related Accounts" (par. 2.D.2):

a. the total number of accounts; and
b. as to each account:
i. the maximum value, in dollars, of each account, during the Applicable Period;
ii. the number of U.S. persons or entities affiliated or potentially affiliated with each account, and further noting the nature of the relationship to the account of each such U.S. person or entity or potential U.S. person or entity (e.g., a financial interest, beneficial interest, ownership, or signature authority, whether directly or indirectly, or other authority);
iii. whether it was held in the name of an individual or an entity;
iv. whether it held U.S. securities at any time during the Applicable Period;
v. the name and function of any relationship manager, client advisor, asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other individual or entity functioning in a similar capacity known by the Bank to be affiliated with said account at any time during the Applicable Period; and
vi. information concerning the transfer of funds into and out of the account during the Applicable Period on a monthly basis, including (a) whether funds were deposited or withdrawn in cash; (b) whether funds were transferred through an intermediary (including but not limited to an asset manager, financial advisor, trustee, fiduciary, nominee, attorney, accountant, or other third party functioning in a similar capacity) and the name and function of any such intermediary; (c) identification of any financial institution and domicile of any financial institution that transferred funds into or received funds from the account; and (d) any country to or from which funds were transferred.

The U.S. will then use that data to fashion what are called group requests under the Exchange of Information provision of the U.S. Swiss Double Tax Treaty (and the protocol).  Note particularly that the information will include the identities of financial institutions to which U.S. deposits were moved, so that the IRS will have the ability to follow the money even beyond Category 2 banks and take appropriate action (perhaps criminal prosecution of the transferee financial institutions if they did not join as Category 2 and/or making group or John Doe requests to those institutions).  And, when the IRS goes to the transferee financial institutions with group or John Doe requests, it will not only get the information about the accounts being transferred but also information in the institution about other U.S. depositors unaffiliated with the transferring Category 2 bank who meet the characteristics for the group or John Doe request.

A recent DOJ comment on the penalty program provides:

Assistance with treaty requests (Program II.D.4). As soon as is practicable, the Tax Division intends to submit to the Swiss authorities, through the Competent Authority, requests for assistance under Article 26 (Exchange of Information) of the Convention Between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income signed at Washington, October 2, 1996, together with a Protocol to the Convention. A Category 2 Swiss bank that wishes to extend the time in which it may demonstrate that an account was disclosed to the IRS through an announced Offshore Voluntary Disclosure Program, as described in the following paragraph, must provide information by June 30, 2014, to the satisfaction of the Tax Division, relating to its accounts for which there is a reasonable suspicion that the U.S. account-holder has engaged in conduct such that Swiss authorities may provide assistance under the 1996 Convention and Protocol. Notwithstanding this June 30, 2014, deadline, the Swiss bank’s obligation to cooperate with the preparation of requests for assistance under the 1996 Convention and Protocol, or such later Convention or Protocol that may enter into force, is a continuing one as described in Part II.D.4 of the Program. 

See DOJ Tax Issues Comments on the DOJ Swiss Bank Initiative (Federal Tax Crimes Blog 6/5/14), here.

While the Swiss has traditionally not responded to requests that did not identify the account holder, it is now willing to and committed to respond to such requests (called group requests or, as I call them, John Doe treaty requests) which identify characteristics that suggest tax fraud or at least serious U.S. tax noncompliance.  The actual full bore application of this expanded scope for treaty requests may have to await the Senate's approval of the protocol, but U.S. depositors should be warned that their continuing ability to hide their accounts with Category 2 banks is doubtful.  By the way, Category 2 banks are banks who are self-admitting that they committed U.S. tax crimes, so I see little difficulty in the Swiss responding to those group or John Doe requests.  So, perhaps, even the protocol is not necessary for the Swiss to respond under the more enlightened attitude it has reluctantly adopted for group or John Doe requests.

The significant point for purposes of this blog is that these procedures are designed to give the IRS access to U.S. depositor information for years prior to the procedures permitted by FATCA and the Implementing Agreement.  Those U.S. depositors who have not yet developed a strategy to deal with the issue should do so now.  Those strategies considered should not include a continuing ability to stay hidden from the IRS.

For other blogs on this subject, see

More Developments on Swiss Agreement with U.S. (Federal Tax Crimes Blog 5/29/13), here.

Credit Suisse Sends U.S. Customers Notice of Compliance with Refined U.S. John Doe Treaty Request (Federal Tax Crimes Blog 8/9/12; revised 8/11/12), here.